Retirement benefits, in today’s workforce, hold a similar spot in employees’ minds as coffee or a steady paycheck; they’re a necessity. Without retirement benefits, your organization will likely experience difficulty recruiting and retaining employees.
As Forbes put it, not paying for a retirement plan is not the financial plus it may seem. While you will save on the retirement benefits, your company will likely:
- Experience higher health care costs
- Have to pay above-average wages for comparable positions
- Lose talent for other organization’s with retirement benefits
So, if you accept that your business needs retirement benefits, where do you go next? It starts with deciding which benefits you will offer your staff. For most organizations, the answer is a 401(k). Still, there are other options available.
One retirement benefit that has declined yet remains relatively popular is an employee stock ownership plan. But what exactly are employee stock ownership plans? Why have they declined in frequency? We’ll define ESOPs and explain exactly how these plans can help your organization.
What is an ESOP?
An employee stock ownership plan (ESOP), according to the National Center for Employee Ownership (NCEO), is defined as “when a company sets up a trust fund, into which it contributes new shares of its own stock or cash to buy existing shares.”
ESOPs are most commonly used for a business owner who doesn’t want to sell to their competitor when they’re retiring. So, they sell it instead to their employees and get some cash out of the deal themselves.
Stock ownership plans, according to Benefits Pro, are used in approximately 9,000 U.S. companies, employing more than 15 million workers. All told the value of these businesses total more than $1.3 trillion.
Over the past decade, participation and assets in ESOPs have increased, but total participation has declined. What’s the explanation behind this conflicting trend? The simple answer is price. It’s both cheaper and easier to set up a company 401(k) as opposed to an employee stock ownership plan. Setting up an ESOP typically costs hundreds of thousands of dollars.
Also, the rules of employee stock ownership plans are complicated. Compared to a straightforward 401(k) plan, ESOPs are more difficult for your employees to understand and appreciate. This confusion can lead to some employees or recruits not valuing ESOPs as much as a more prevalent retirement plan.
Read more about ESOPs and other retirement plans.
How are ESOPs Changing?
A recent settlement between the Department of Labor (DOL) and First Bankers Trust has changed the game for ESOPs. Specifically, the rules have changed for company owners using an ESOP as a vehicle for selling to family members or their management team.
Employee stock ownership plans must now follow the new regulations, produced from this settlement. These new rules include:
- Trustees that establish ESOPs must demonstrate proper consideration was given to the ESOP as a buyer of a company and/or that it has effective control
- This demonstration can include establishing a board that includes an independent director, or, receiving a discount on the purchase price
Basically, if an owner wants to sell their shares in an ESOP, they need to have an “outsider” on their board. Or they must demonstrate the purchase price was negotiated, in good faith, to determine the fair market value of the stock price.
How Can an ESOP Boost Your Business?
The biggest draw of employee stock ownership plans is that they promote company and employee alignment. Essentially, ESOPs incentivize employees through participation in company ownership.
For business owners, an ESOP is also an important vehicle in succession planning. These plans are tools to ensure organizational culture and current employees would survive and ownership transition. Additionally, ESOPs help business owners avoid or defer capital-gain taxes.
Still, there is more than just anecdotal evidence to suggest that ESOPs can help an organization succeed. Per EBA, employee-owned companies grow about 2.5 percent per year faster than non-employee-owned companies. Similarly, these companies have 1/3 to 1/5 as many layoffs.
But it is not just the business or the business owner, that can benefit from employee stock ownership plans. Employees too, stand to gain from an ESOP. According to Benefits Pro, employee-owners:
- Are more likely to rise toward the middle class
- Have 92 percent greater median household net worth than nonemployee-owners
- Take home 33 percent higher income from wages
Employee stock ownership plans, while expensive, can prove valuable for both employers and employees. While an ESOP may not be a necessity, like that slightly-burnt pot of office-coffee, it can offer your business tangible benefits.